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Fiat Money Means Fiat Freedom: Greenback Dollars

Gary North
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Reality Check (Oct. 23, 2012)

And I don't give a damn about a greenback dollar. Spend it as fast as I can. -- Hoyt Axton.

That is where Hoyt and I part company. I care about greenback dollars, both in theory and practice. So should you.

Whenever government is in control of money -- which is always -- this means that free men are not in control over their lives. Their decisions as buyers and sellers are allowed only within the confines of the national government, the central bank, and commercial banks. They possess a legal monopoly (really, an oligopoly) over money.

Politicians like fiat money because it lets them buy votes and tenure. Bankers like fiat money because it lets them buy goods, services, tenure, and power.

This government-business arrangement is universally praised in every college-level textbook on economics. They praise the economics of the bankers' cartel. The government is the enforcer of this cartel. The textbooks do not mention rival views.

There are two schools of economic opinion that oppose this cartel. The Austrian School does. It recommends the elimination of all government intervention into the money market, other than the enforcement of contracts. The Greenbackers also oppose it. They want a 100% monopoly of civil government over money. All banks will be government-owned.

So, citizens must make a choice between these rival views: trust the free market or trust the state.

Austrians argue that it is not safe to trust the state. The state is there to expand its power over all those under its authority. Control over money is vital in the state's program to expansion its power. Therefore, if you recommend fiat money, you necessarily recommend fiat freedom. They oppose the Greenbackers' solution to the government-bankers alliance, namely, a government monopoly over money.

Recently, Greenbackers received support from an unlikely source: an article published by the International Monetary Fund (IMF), an organization that asserts power over Western banking. It uses loan guarantees forced on voters to bail out bankrupt governments and banks. The article praised a proposal first made in academia during the Great Depression, but which had been promoted by the political Left in the United States since the 1880s: Greenbackism.

In Great Britain, a journalist has become the promoter of this solution, sort of. He says he does not understand it, but he thinks it is worth of consideration.

It is not worth of consideration, except as an example of really bad economic theory and even worse monetary history.


Ambrose Evans-Pritchard has outdone himself in stringing together a series of unsubstantiated historical facts connected by a truly crackpot monetary theory.

His article begins with a headline that announces utter nonsense: IMF's epic plan to conjure away debt and dethrone bankers. It refers to an article published by the IMF. At the beginning of that article, we read this:

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

In short, his headline is fraudulent. It deceives readers.

He then begins:

So there is a magic wand after all. A revolutionary paper by the International Monetary Fund claims that one could eliminate the net public debt of the US at a stroke, and by implication do the same for Britain, Germany, Italy, or Japan.

In short, it begins with a denial of the fundamental fact of economic theory and practice: TANSTAAFL. There ain't no such thing as a free lunch.

The article goes downhill from here.


Here is his summary of the IMF essay's claim:

One could slash private debt by 100pc of GDP, boost growth, stabilize prices, and dethrone bankers all at the same time. It could be done cleanly and painlessly, by legislative command, far more quickly than anybody imagined.

This is the equivalent of the perpetual motion machine. This is Rumpelstiltskin with a printing press.

The conjuring trick is to replace our system of private bank-created money -- roughly 97pc of the money supply -- with state-created money.

This is Greenbackism by another name. I have dealt with this before.

He goes on:

We return to the historical norm, before Charles II placed control of the money supply in private hands with the English Free Coinage Act of 1666.

To the extent that there is an historical norm of successful currency, it is the gold coinage of the Byzantine empire, which remained unchanged from about 325 until around 1000. That is the only known example in human history of a monetary system achieving stability for over 500 years.

Specifically, it means an assault on "fractional reserve banking". If lenders are forced to put up 100pc reserve backing for deposits, they lose the exorbitant privilege of creating money out of thin air.


The question then arises: Which institutional arrangement can achieve this? The free market or national civil government? He defends his theory by an appeal to the sovereign state. Gold or silver? Perish the thought. Yet Murray Rothbard wrote The Case for a 100% Gold Dollar in 1962. It called for the abolition of fractional reserve banking.

The nation regains sovereign control over the money supply. There are no more banks runs, and fewer boom-bust credit cycles. Accounting legerdemain will do the rest. That at least is the argument.

How is it that we can now trust the modern state with authority over money? How is it that it will promote and enforce 100% reserve banking? It never has in the past. This is the historical norm.


He cites a paper written by two unknown economists, Jaromir Benes and Michael Kumhof. He says it is acquiring "a cult following around the world. I am not well-informed on cult followings within, but with respect to Mr. Evans-Pritchard's summary of it, I think the adjective "cult" is appropriate.

Entitled "The Chicago Plan Revisited", it revives the scheme first put forward by professors Henry Simons and Irving Fisher in 1936 during the ferment of creative thinking in the late Depression.

Ah, yes: Irving Fisher. The man who said there would be no decline in the stock market in September 1929, and who then lost his personal fortune and his sister-in-law's, too. A real expert, you see. He spent the remainder of his career defending two things: pure fiat money and eugenics.

Ludwig von Mises devoted a section of his Theory of Money and Credit (1912) to a refutation of Fisher's views. These are old arguments. They were exposed as untenable a century ago. Fisher's system of index numbers is the basis of the manipulated currency, and this enhances the power of the state. Mises wrote:

It is a serious error to fall into to imagine that the methods suggested by monetary theorists and currency statisticians can yield unequivocal results that will render the determination of the value of money independent of the political decisions of the governing parties. A monetary system in which variations in the value of money and commodity prices are controlled by the figure calculated from price statistics is not in the slightest degree less dependent upon government influences than any other sort of monetary system in which the government is able to exert an influence on values (p. 407).

Evans-Pritchard continues.

Irving Fisher thought credit cycles led to an unhealthy concentration of wealth. He saw it with his own eyes in the early 1930s as creditors foreclosed on destitute farmers, seizing their land or buying it for a pittance at the bottom of the cycle.

He saw that? Maybe so. He also saw the stock market make him a pauper. Yale University gave him free rent, so destitute was he.

The farmers found a way of defending themselves in the end. They muscled together at "one dollar auctions", buying each other's property back for almost nothing. Any carpet-bagger who tried to bid higher was beaten to a pulp.

I see. Pitchfork justice. None of that contract stuff. Private coercion works so much better.


Benes and Kumhof argue that credit-cycle trauma - caused by private money creation - dates deep into history and lies at the root of debt jubilees in the ancient religions of Mesopotian [sic] and the Middle East.

It took state coercion to end it, he tells us that they say.

What are their sources? The favorite Greenbacker monetary historian, Alexander del Mar. Who else? The Greenbacker Stephen Zarlinga. And then, the capper: three volumes by the chemist-turned-monetary-crank, Frederick Soddy -- even a self-published one I had not heard of. I have been one-upped. I do not get one-upped often in the bibliography of monetary cranks. I have been collecting this literature for 50 years. You can read their paper here.

The Athenian leader Solon implemented the first known Chicago Plan/New Deal in 599 BC to relieve farmers in hock to oligarchs enjoying private coinage. He cancelled debts, restituted lands seized by creditors, set floor-prices for commodities (much like Franklin Roosevelt), and consciously flooded the money supply with state-issued "debt-free" coinage.

In short, he violated contract. He debased the coinage. He was just like FDR, we are told.

Quite correct. He was.


The Romans sent a delegation to study Solon's reforms 150 years later and copied the ideas, setting up their own fiat money system under Lex Aternia in 454 BC.

Have you ever heard of this? No. Do the authors supply any footnotes? No.

They became the foundation of the Roman monetary system from 454 BC (Lex Aternia) until the time of the Punic wars (Peruzzi (1985)). It is also at this time that a link was established between these ancient understandings of money and more modern interpretations. This happened through the teachings of Aristotle that were to have such a crucial influence on early Western thought. In Ethics, Aristotle clearly states the state/institutional theory of money, and rejects any commodity-based or trading concept of money, by saying "Money exists not by nature but by law." The Dialogues of Plato contain similar views (Jowett (1937)). This insight was reflected in many monetary systems of the time, which contrary to a popular prejudice among monetary historians were based on state-backed fiat currencies rather than commodity monies. Examples include the extremely successful Spartan system (approx. 750-415 BC), introduced by Lycurgus, which was based on iron disks of low intrinsic value, the 390-350 BC Athenian system, based on copper, and most importantly the early Roman system (approx. 700-150 BC), which was based on bronze tablets, and later coins, whose material value was far below their face value.

Athens was statist to the core. So was Sparta. They were based on slavery. Their citizens held that life is worth living only as part of the polis. Socrates, Plato, and Aristotle taught this. Both cities created empires. They fought a long war against each other by using fiat money. They destroyed each other, leading to their easy conquest by Aristotle's student, Alexander the Great.

They should be our model?

It is a myth - innocently propagated by the great Adam Smith - that money developed as a commodity-based or gold-linked means of exchange. Gold was always highly valued, but that is another story. Metal-lovers often conflate the two issues.

If you read the Bible, you find that gold and silver functioned as money. But the counterfeiters cheated. The prophet Isaiah called the rulers to account because of their debased currency. "Thy silver hath become dross, thy wine mixed with water" (Isa. 1:22). Evans-Pritchard mentions none of this.

Anthropological studies show that social fiat currencies began with the dawn of time. The Spartans banned gold coins, replacing them with iron disks of little intrinsic value. The early Romans used bronze tablets. Their worth was entirely determined by law - a doctrine made explicit by Aristotle in his Ethics - like the dollar, the euro, or sterling today.

This is standard Greenback monetary theory: the state imputes value to money. The free market is an afterthought.

Fact: every state that has ever held this theory has destroyed its currency.

The lack of historical documentation is remarkable.

Some argue that Rome began to lose its solidarity spirit when it allowed an oligarchy to develop a private silver-based coinage during the Punic Wars. Money slipped control of the Senate. You could call it Rome's shadow banking system. Evidence suggests that it became a machine for elite wealth accumulation.

What evidence? Published where?

Unchallenged sovereign or Papal control over currencies persisted through the Middle Ages until England broke the mould in 1666. Benes and Kumhof say this was the start of the boom-bust era.

Based on what historical records? There was no such Papal control. Medieval history left nothing like modern records of the economy. It is not possible to build a comprehensive history of the business cycle based on existing records.


Now he goes to two professors of economics, Fisher and Henry Simon. Neither of them persuaded any of their contemporaries of their theory of 100% reserves and 100% fiat money.

The original authors of the Chicago Plan were responding to the Great Depression. They believed it was possible to prevent the social havoc caused by wild swings from boom to bust, and to do so without crimping economic dynamism.

The benign side-effect of their proposals would be a switch from national debt to national surplus, as if by magic. "Because under the Chicago Plan banks have to borrow reserves from the treasury to fully back liabilities, the government acquires a very large asset vis-à-vis banks. Our analysis finds that the government is left with a much lower, in fact negative, net debt burden."

By magic, indeed. No one in government or academia believed them. No one should have believed them.

The IMF paper says total liabilities of the US financial system - including shadow banking - are about 200pc of GDP. The new reserve rule would create a windfall. This would be used for a "potentially a very large, buy-back of private debt", perhaps 100pc of GDP.

Do you believe this? Do you understand this? It is clear that Evans-Pritchard does not understand it.


What "buy back"? Purchased with what? On what terms? By whose authority? Governed by what agency? Compelled by what threat?

While Washington would issue much more fiat money, this would not be redeemable. It would be an equity of the commonwealth, not debt.

I see. It's equity in the commonwealth! A government agency says it is equity. Of course, there is no organized capital market for it. It is not owed by anyone to anyone. It is not a legal contract. But it's equity in the commonwealth.

We have seen this before. That was the economy theory that undergirded the issuing of fiat money by the government of the French Revolution. There is a book on this, Fiat Money Inflation in France. It was published in 1896. It is a shame that the two economists and Evans-Pritchard seem unaware of it.

The key of the Chicago Plan was to separate the "monetary and credit functions" of the banking system. "The quantity of money and the quantity of credit would become completely independent of each other."

Private lenders would no longer be able to create new deposits "ex nihilo". New bank credit would have to be financed by retained earnings.


Then who will decide who gets the capital?

"The control of credit growth would become much more straightforward because banks would no longer be able, as they are today, to generate their own funding, deposits, in the act of lending, an extraordinary privilege that is not enjoyed by any other type of business," says the IMF paper.

Again, who holds the purse strings? The government. But which agency? Run by what principles?

"Rather, banks would become what many erroneously believe them to be today, pure intermediaries that depend on obtaining outside funding before being able to lend."

Pure intermediaries? Intermediaries for whom?

The US Federal Reserve would take real control over the money supply for the first time, making it easier to manage inflation.

I see. A quasi-private cartel will decide who gets what money.

It was precisely for this reason that Milton Friedman called for 100pc reserve backing in 1967. Even the great free marketeer implicitly favoured a clamp-down on private money.

He was a devoted follower of Fisher's statistical approach to monetary theory. But he did not stick with 100% reserve banking. He did not stick with any policy, or even a definition of money.

The switch would engender a 10pc boost to long-arm economic output. "None of these benefits come at the expense of diminishing the core useful functions of a private financial system."

This is fiat money with a vengeance, based on a compulsory swap of legal IOUs (contracts) from private parties in exchange for "equity" issued by the government (or is it the FED?) that has no definition, no contractual basis, and no capital markets.


He concludes with this.

Simons and Fisher were flying blind in the 1930s. They lacked the modern instruments needed to crunch the numbers, so the IMF team has now done it for them -- using the `DSGE' stochastic model now de rigueur in high economics, loved and hated in equal measure.

They were flying blind then. Their disciples are flying blind today.

The finding is startling. Simons and Fisher understated their claims. It is perhaps possible to confront the banking plutocracy head without endangering the economy.

I see. The Federal Reserve will stamp out the banking plutocracy, just as it has done over and over, ever since it opened for business in 1914.

Benes and Kumhof make large claims. They leave me baffled, to be honest.

They will leave any reader with any knowledge of monetary theory or monetary history baffled.

To do this on a permanent basis in peace-time would be to change the nature of western capitalism.

He's got that right!

Arguably, it would smother freedom and enthrone a Leviathan state. It might be even more irksome in the long run than rule by bankers.

He's got that right, too.

Personally, I am a long way from reaching an conclusion in this extraordinary debate. Let it run, and let us all fight until we flush out the arguments.

The arguments do indeed deserve to be flushed. Not out. Down.

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